Good morning and welcome ladies and gentlemen to the Gulf Island Fourth Quarter 2018 Results Conference Call. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded. At this time, I'd like to turn the conference over to Ms. Cindi Cook for opening remarks and introductions. Cindi, please go ahead..

Thank you, Sandy, and good morning. I would like to welcome everyone to Gulf Island's fourth quarter 2018 teleconference. Our results were released yesterday afternoon and a copy of the press release is available on our website at gulfisland.com. A replay of today's call will be available on our website later today.

Please keep in mind that the press release and certain comments on this call include forward-looking statements and actual results may differ materially. We would like to refer everyone to the cautionary language included in our press release and to the Risk Factors described in our 2017 Form 10-K and subsequent SEC filings. Today, we have Mr.

Kirk Meche, President, CEO and Director and Mr. Wes Stockton, our Executive Vice President and Chief Financial Officer. Mr.

Meche?.

Thank you, Cindi and good morning to all of our listeners. Our results for the quarter had several factors that were noteworthy which I would like to address before Wes discusses our financial results for the quarter.

First, as discussed in our press release, we experienced forecast cost adjustments on our 10 harbor tug projects related to challenges we incurred during the installation and testing of the piping systems on the projects.

Specifically, the problems incurred related to the type of connection required for the entire piping system, our estimate which was performed on our Jennings facilities was based on historical results achieved on similar vessels constructed in that facility.

However, we underestimated the impacts of differences between the specifications associated with the interconnectivity of the piping systems.

These differences added increased complexity to the installation, testing and subsequent repairs required during the commissioning base of the projects and accordingly, resulted in increased labor cost and schedule impacts.

The full impact of these issues were identified during the fourth quarter 2018 and early 2019 as we completed the pipe and installation and hydro testing of the systems on the first and second vessels. The first vessel was delivered in the fourth quarter 2018 and we anticipate delivery of the second vessel in the first quarter 2019.

Our forecast cost increase reflects the impacts on these two vessels as well as revised estimates remaining eight vessels based on our actual experience in the first two vessels. We're taking actions to mitigate the cost impacts of the remaining vessels by prior lessons learned from the first two vessels.

More broadly, we have taken corrective action to improve our estimating function by centralizing all estimated efforts in our Houma shipyard, which has proper resources, processes and procedures to prevent such an oversight in the future.

In addition to the impacts of the harbor tug project, the quarter was impacted by the underutilization of our facilities within our Fabrication division and to a lesser extent our Houma Shipyard division during this quarter.

This underutilization was not unexpected and represents an improvement in overall utilization from a year ago and on a sequential quarterly basis. We anticipate continued improvement in our utilization as our backlog ramps up specifically in our fabrication facilities. Now let me discuss projects that were awarded during this quarter.

We received an award for two passenger vehicle ferries for the North Carolina Department of Transportation. Also during this quarter, we received notification of the Court of Federal Claims enter the judgment in favor of the U.S.

Navy as it relates to Navy's T-ATS program thus allowing us to commence fabrication upon completion of specific engineering and receipt of material. In addition, yesterday we received a letter of intent for our Fabrication division for the construction of a jacket deck and piles for a structure to be installed off the coast of Trinidad.

This work is consistent with our traditional historic work for the fabrication division and we were thrilled to be a part of this project.

As it relates to our shipyard division and the construction and delivery of two MPSVs for a customer, we have nothing significant to report this quarter as we continue to work with a bonding company towards resolution. The vessels and associated equipment and material continue to be in our care and custody at our shipyard in Houma, Louisiana.

I'll now turn the call over to Wes, who will provide details of our results and segment breakdown..

Thanks Kirk and good morning, everyone. I would now like to provide some additional details on our results for the quarter, Consolidated revenue for the fourth quarter 2018 was $60.2 million with a net loss of $4.7 million or diluted loss per share of $0.31.

This compares to revenue for the fourth quarter 2017 of $37.3 million and a net loss of $24.3 million or diluted loss per share of the $1.63. Our revenue for the quarter reflects an increase in construction activities for our shipyard division offset partially by a decrease in activity for our fabrication division.

Our operating results for the quarter were primarily impacted by lower revenue volume for our fabrication division and associated partial under recovery of our overhead costs and forecast cost increases of $5.8 million on our harbor tug projects in our shipyard division.

These impacts were partially offset by continued strong results for our Services division a $2.8 million benefit in our Fabrication division from the recovery of a bad debt that was reserved during the third quarter 2018 and a net gain of $1.2 million from the sale of our Texas North yard and impairments of certain inventory and assets that are held for sale.

Our loss decreased relative to comparable period due primarily to increased revenue for our Shipyard division and the comparable quarter including changes in estimates on our MPSV projects, which have been suspended. The loss also decreased due to reductions in overhead costs and improved recoveries of our costs across our divisions.

The benefit of the previously mentioned bad debt recovery in our Fabrication division and the prior period, including net charges associated with impairments of certain inventory and assets held for sale. To provide a little more insight into our operating results for the quarter, let me provide some additional details by operating segment.

For our Shipyard division, revenue was $29.7 million for the quarter versus $900,000 for the comparable period of 2017. Operating loss for the quarter was $6.6 million compared to an operating loss of $27.5 for the same period of 2017.

The increase in revenue was due to increased construction activities for our 10 harbor tug vessels and our icebreaker tug and due to the prior period reflecting a significant reversal of revenue associated with -- associated with our two MPSV projects as a result of changes in estimates on the projects, including reductions in project price.

The operating loss for the 2018 period was due to the aforementioned $5.8 million charge on our harbor tug project and an impairment of $1 million related to assets held for sale.

The decrease in operating loss relative to the 2017 period was due primarily to higher revenue, reductions in overhead costs and improved recoveries of our cost and the prior period including the aforementioned changes in estimates on the MPSV projects.

For our Fabrication division, revenue was $9.8 million for the quarter versus $15.4 million for the comparable period of 2017, representing a decrease of 36%. Operating income for the quarter was $2.2 million compared to an operating loss of $9.8 million for the same period of 2017.

The decrease in revenue was due to the prior period including significant activity for our module fabrication project that was completed in the second quarter 2018, for the current period reflecting reduced revenue as construction activities were just commencing for projects awarded in the third and fourth quarters of 2018.

Operating income for the 2018 period benefited by $2.8 million from the recovery of the previously mentioned bad debt that was reserved during the third quarter 2018 and a net gain of $2.2 million from the sale of our Texas North yard and impairment of certain inventory.

These benefits were partially offset by the under recovery of our overhead costs. The improvement in operating results relative to the prior period was due primarily to the benefit of the bad debt recovery during the 2018 quarter and the prior period including impairments of inventory of $6.7 million.

We expect to see an increase in revenue and improvement in the recovery of our overhead costs as the recently awarded projects in our backlog progressed through the construction phases. For our Services division revenue was $21.5 million for the quarter versus $21.7 million for the comparable period of 2017.

Operating income for the quarter was $2.1 million or 10% of revenue compared to operating income of $1.5 million or 7.1% of revenue for the same period of 2017. The increase in operating income and associated margins was due to increased recovery of our overhead costs.

For our EPC division, revenue was $451,000 for the quarter, versus $198,000 for the comparable period of 2017. Operating loss for the quarter was $488,000, compared to operating income of $41,000 for the same period of 2017. Revenue for our EPC division continues to consist of pricing, planning and scheduling work for the SeaOne project.

Our loss for the period was due to cost incurred that are not fully recoverable and our current scope of work authorized by SeaOne. Now let me provide a few comments regarding our income taxes and our backlog and liquidity as of yearend.

Our tax expense for the 2018 quarter reflects only state income taxes as we've not recorded any federal income tax benefit for our losses due to GAAP limitations on recognizing deferred tax assets. Although we've not recorded a tax benefit in our results, we will receive a cash tax benefit on future taxable income.

Moving on to backlog, at December 31, 2018, our backlog totaled approximately $357 million, representing an increase of $135 million from our year ago backlog. Our yearend backlog by operating segment was $282 million for our Shipyard division, $64 million for our Fabrication division, $11 million for Services division $400,000 for our EPC division.

Please note that backlog excludes approximately $14 million for our new project award within our fabrication division that was received subsequent to yearend. Backlog also excludes options on contracts within our Shipyard division, which if exercised will increase our backlog by approximately $534 million and includes project deliveries through 2025.

With respect to liquidity, we ended the year with cash and short-term investments of $79.2 million, an increase of almost $25 million from September 2018 and an increase of $70 million from our balance of prior yearend.

Our increase in cash and investments for the quarter was primarily the result of net proceeds of $27.4 million for the sale of our Texas North yard offset partially by negative operating cash flows of $1.7 million and capital expenditures of $1.1 million.

Although we experienced negative operating cash flows for the fourth quarter, we realized positive operating cash flows of $6 million over the last six months of 2018.

In addition at yearend, we had $2.9 million of outstanding letters of credit and no borrowings on our credit -- no borrowings on our credit facility, providing $37.1 million availability for additional letters of credit for borrowings.

As a result of the aforementioned, our liquidity remains strong with total cash investments and availability under our credit facility of approximately $116 million at December 31, 2018 and please note our current liquidity excludes any potential proceeds from the sale of machinery and equipment totaling $18.9 million, that remains held for sale at yearend.

So with that I'll now turn the call back over to Kirk for final comments..

Thanks Wes. Although we were not pleased with the negative impact on the tug project, we were implying lessons learned to remaining work in future opportunities within all of our divisions.

We continue with our strategic plans for recovery of our underutilized overheads and targeted projects and we remain positive and optimistic with respect to future opportunities for all of our business lines.

The awarded several projects during the quarter along with the award for our Fabrication division of the Jacket deck and piles, prove that our efforts are on target. Again for another quarter, our divisions continue to see significant bidding activity. Sandy, you may now open the lines for questions..

[Operator Instructions] We'll take the first question from Martin Malloy of Johnson Rice..

Could you maybe spend a little time talking about how you expect the pace to ramp up for work on the Navy vessels, are the Navy vessel right now I guess none of the options are being exercised and also the Oregon vessels and I guess the potential for further awards for both types of vessels?.

Sure Marty, so let's start with the Navy vessels. As we reported, we got -- the Navy had a positive I guess ruling as it relates to the protest and so we're currently negotiating with the Navy to reset targets and start times and actual cost and whatnot, but we probably anticipate that starting somewhere later this year.

We still have engineering that was going on, but now that we've got the final green light. We can proceed on to final engineering as well as Oregon material.

So I would anticipate Navy storing probably somewhere in the third quarter or the fourth quarter of this year and again we'll get more specifics as we get our contracts finalized and negotiations complete with Navy.

The remaining, as we talked about the remaining seven options, we believe that there maybe two options that maybe eminent within the next couple of quarters, we anticipate hopefully knowing something on vessel number two and three within second quarter of this year.

As it relates to the Oregon State University projects, again we have two vessels that we have under contract. The second vessel keel laying ceremony will actually be held in the second quarter this year and as it relates to the third option on it, I believe the option would probably sometimes later in this year as well.

So we're on track, we believe that there is some synergies in terms of both customers options as it relates to those two projects, but again there is no guarantees going forward, but we are getting positive comments from the customer as we try and get our way through especially the Navy's T-ATS on the first vessel..

And if we look at the fourth quarter results and back out some of the one-time type charges, you are making a lot of progress towards profitability.

How should we think about turning profitable here in '19, the timing of that?.

Marty, this is Wes. What we expect to see is and we mentioned this I think the last time we talked, the early part of next year, the shipyard it's no longer an overhead utilization story. So we will recover our overheads. We're still going to be dealing with the lower margins.

Some of the lower margin backlog including of course the tug that will have revenue with no associated margin on them.

And in the fabrication business, it'll still be more of a challenge from a recovery perspective, but one of the things to note this quarter versus last quarter is we're going into this quarter with $64 million of backlog plus the recent award that Kirk mentioned.

When we went into the fourth quarter or the third quarter of last -- third quarter of this year, we had little to no backlog in the fab business, but that work is ramping up and so as we get into the latter part of 2019, we expect to start finding ourselves back in the black as it relates to operating income or EBITDA. Did I answer your question..

Yes. Thank you..

The next question comes from Jeff Geygan at Global Value Investment Corporation..

Good morning. Thank you for your time. I'm hoping you can put some color around the changes you had with the tugs and talk about either margins or profitability on a per vessel basis or on the overall project.

And then secondarily, what are you doing to mitigate changes like this as it seems like they’ve been involved in a few projects recently?.

So let me address what we're doing to address the issue that are eminent within these tugs.

As I said in my opening remarks, we are centralizing estimating efforts, we move that to our Houma location where there's greater amount of resources available to put estimates together and make sure that we're completing checks and balances as it relates to the projects and similarities between past products and the one that we're bidding on.

So that's the biggest change we have going forward. Again, as it relates to each one of the tugs, I don't want to get too specific into each one of the tug, but it's a pretty simple math, there is 10 tugs and so as we said in earlier remarks that we implied that loss across the Board to all of them.

There might have been a slight improvement towards the tail end of them but the problem associated what we did was its recurring. It's not just going to happen on one of two of the tugs. Again I don't want to emphasize that this is not a -- this is not an efficiency problem or it is not an efficiencies in terms of the labor aspect.

This is an under estimate as it related to the bid when we submitted it and related to the piping systems..

Is that project as a whole across all 10 vessels still profitable?.

No..

All right, it's good to see that you have some work in the Fabrication division. Can you give us a sense of the scope of the jacket projects.

I thought I heard $14 million, but I might be mistaken and then talk about how that affects utilization in the Fabrication division and what kind of margins or profitability we might expect on that project qualitatively?.

Yeah, so Jeff what we -- I am not going to disclose the value of the contract, I'll tell you, you're fairly close in terms of the size and complexity of this jacket, that compiles. We're pretty excited about it. This is our core business. This is what we've done in the past.

So we haven't seen much of that type of work in last several quarters, much less, probably almost a year now. I won't tell you that it is a Renaissance because it's certainly not.

It's a one-off project, but the relationship that we're establishing with the customer for the project, I think may have some benefit for us in the future quarters as they continue to pursue, structure is not certainly not for the Gulf of Mexico, but overseas markets and primarily the Trinidadian market again.

So we're very excited to have that in the facilities as it takes a lot of underutilization out of some of our factors including our [indiscernible] mills, which had been pretty idle for a period of time now. We get those things quite back up. So it's as we said, it's a step in the right direction.

We're very excited about the project and even more excited to have the relationship with the customer as they continue on with their projects in terms of trying to get these structures installed around the world. So that was good for us in that respect..

And it will clearly help us with our utilization in the facility and don't want to give any specific numbers, but that's definitely a benefit for us and just follow-on to Marty's question and because we do have a lot of noise in the quarter unfortunately, but if we adjust for the various puts and takes, our EBITDA is about a push for the quarter and we're looking at something similar to that as we move into the first part of next year, and with a goal towards kind of breakeven operating income as we get to the back half of the year..

The award of a project in the fabrication division is certainly exciting.

As you look forward either in offshore oil and gas, domestically or internationally or for projects like offshore wind or with SeaOne, can you provide some color around what you're seeing in the market and maybe specifically talk about your ongoing relationship with SeaOne and the size of EPC division as it stands today?.

Right so Jeff, let me address it. In my opening comment I also said something about or maybe my closing comments, we talk about the levels of bidding activity in the facilities and it's at an all-time high.

The majority of that work that is in our estimating departments now as we speak, deals with the petrochemical industry it's a lot of these big products that are finally come to fruition, you probably read that McDermott had got an award, the Golden Pass, but there's other products out there that we're chasing with other clients including Driftwood [ph] and whatnot.

So our bidding activities are ramping up and I think these guys are recognizing that the renaissance is starting to come and so they are all trying to get pricing and see if they can get contractor secured as we move this thing forward. As it relates to SeaOne, again we're not really sure on the status of their financing.

They told us, it would be another quarter, but quite frankly, we're going to concentrate our efforts on the products we see, that has some validity as we try and get these facilities up and running as Wes says.

The overhead utilization down to where we needed to be, so not much to report this quarter on SeaOne, the team back there is being multitasking some respect. We're letting them assist us with some of these bids because again it is quite a number of bids that are coming in the facilities and unfortunately the time they all do it the same time.

So we're trying to pick and choose once we think they have opportunity for us to not only have better margins, but to strengthen the relationship with the customers as we go forward..

Good color. Thank you very much for your time and we look forward to 2019..

[Operator Instructions] There appears to be no more questions at this time..

Okay. This concludes the Gulf Island conference call. We thank everyone for listening. Have a good day. Thank you..

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect..